Venture Vérité: United Parcel Service

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Venture Vérité: United Parcel Service

Can an old-style bureaucratic giant give birth to a hot Net startup?

Even as a talking head, beamed from London to Atlanta, Ken Lyon was bursting with energy. It was early morning in the States, so the group assembled in a conference room at United Parcel Service's Logistics Group was still a bit sleepy as it watched Lyon on the screen. But Lyon, the group's IS director, was making this November 1998 pitch to fund a pet project - an idea he'd been incubating for nearly 10 years - and his rapid-fire, staccato speech quickly shook his audience awake.

"Sooner or later," he said, "a company will come along and take advantage of the Web to provide all kinds of logistics services and information. They'll put inventory management online, allow global visibility of where any item is at any stage of the production or distribution process. They'll create electronic markets for shipping. Fixed pricing will disappear. The logistics market will evolve in the way the financial markets have. We can sit around pretending this isn't going to happen, or we can be proactive. This is going to happen."

Lyon's impassioned pitch was calculated to convince Logistics Group CEO Dan DiMaggio that UPS should set out to be that company. If UPS could build the Internet's dominant logistics hub, it stood to make a mint - and redefine Big Brown as a 21st-century Internet force.

The heart of Lyon's idea: Scale up the size of the data networks the Logistics Group was already building, in a way that would let anyone who shipped or stored products get real-time information. A user of this system, which Lyon was calling eLogistics.net, could decide where to establish tracking points - anyplace along a product's path, from raw materials to consumer delivery. The trucking company that carried finished products from your plant in Louisiana to a warehouse in Kentucky might already be plugged in to your internal tracking system, but the firm that managed your warehouse might not be. It would be easy, though, for any Net-connected company to hook up to eLogistics.net and provide updates on things like inventory levels. Lyon argued that Metcalfe's Law - which says that the value of a network grows exponentially with the addition of new nodes - offered the potential to quickly turn the proposed site into the de facto portal for shipping and logistics data.

As Lyon wrapped up his transatlantic presentation, he explained that UPS should be flexible about the revenue model. This was, after all, an Internet play, and no one was sure whether it made more sense to sell access on a per-use basis, as an annual subscription, or on some other kind of software-licensing model.

If UPS can build the Internet's dominant logistics hub, it will make a mint - and redefine Big Brown as a 21st-century force.

Dan DiMaggio, a 28-year UPS veteran, confessed to feeling "a bit of hesitancy" about the idea. It seemed amorphous to him, and he wasn't sure how concrete it would be to customers. It required a dedicated development crew, and DiMaggio's organization tends to be strapped for people.

But Lyon's charisma won him over. "Ken's an entrepreneur. He's definitely on the creative side," DiMaggio says.

Late last year, Lyon took on the eLogistics.net project full-time and began reporting directly to Logistics Group CIO Jay Walsh, who had been a steadfast backer of the concept. They set April 1999 as a launch target and began drawing on a budget that, sources say, is "in the single-digit millions."

There were still unanswered questions, and any of several possible scenarios could play out. Could a company like UPS successfully nurture an entrepreneurial venture? Would Lyon's project be squashed by complacency and bureaucracy? Even worse, would another player in the industry successfully implement the idea first?

The Company

UPS's uncertainty about taking on a big Web project isn't surprising: The company is unrepentant about being an old-fashioned corporate colossus. In the lobby of UPS's world headquarters, just outside Atlanta, you encounter a regal oil portrait of founder Jim Casey. Beside it is a fuzzily inspirational quote etched into the stone wall: "Our horizon is as distant as our mind's eye wishes it to be." Package Car No. 1, the first delivery van UPS purchased when it was created in 1907, is parked along another wall. Male employees wear ties to work every day except Friday - a liberalization introduced only this year.

Were it not for the style of cars in the enclosed parking garage or the glassy, at-one-with-nature design of the buildings, it would be easy to think you'd time-traveled back to the 1950s. Reliability, stability, and efficiency are the cornerstones of the church of UPS. Every day, the company moves 12.5 million packages from one place to another on its fleet of 225 "browntail" jets and 157,000 boxy trucks. Those packages, amounting annually to 6 percent of the country's gross domestic product, are sorted and handled at any of UPS's 1,603 facilities. Measured by either package volume or revenue, UPS is the largest package-distribution company in the world.

UPS's near-military devotion to operational precision keeps the firm financially healthy, though it took nearly two years to recover from a paralyzing 1997 Teamsters strike. Quarter after quarter, the private company generates impressive results for its employee-shareholders. Year-on-year profits were up 37 percent in Q4 of last year, to $482 million. UPS's total revenues for 1998 topped $24 billion. Its private stock has done very well, making legions of its employees - even drivers and custodians - millionaires when they sell their shares back to Big Brown. (The company requires its employees to sell their shares back when they leave or retire.) Seven years ago, UPS bought back shares at $16; this year, the company is paying $43 a share.

The Management

Chair and CEO Jim Kelly started working as a package-car driver at UPS in 1964, just after leaving the US Navy. John Alden, vice chair and a senior VP, started at UPS one year later, just out of college. This kind of tenure isn't unusual at the company; most of UPS's top executives have spent their entire adult lives there. (The average senior manager has been with the company for 30 years.) That contributes to a sense of continuity and loyalty, but even some insiders say that the dearth of outside perspectives can make the company a bit myopic and risk-averse. It was only earlier this year, for example, that its top executives began publicly acknowledging ecommerce as a critical part of UPS's future.

UPS has a clearly defined hierarchy and a promote-from-within mentality. Memos still circulate daily by the hundreds, and rigorous analysis is prized over impulsiveness - most top UPS execs like to pull out a binder full of transparencies when they talk about the company's strategy and place in the market.

Organizationally, the 4,500-person-strong Logistics Group is just one of 10 operating divisions. The heads of each of these divisions report directly to Kelly or Chuck Schaffer, the chief operating officer at UPS. The company holds to a command-and-control mode as its management style of choice. As a result, nearly all important decisions are made at, or near, the top of the food chain.

The Industry

Ten cents of every dollar spent in the US goes to moving and warehousing products. That adds up to $900 billion a year. UPS focuses exclusively on the small-package (less than 150 pounds) segment of the business, which is worth about $53 billion. Every day, things like truck tires, machine parts, computer monitors, office supplies, and live lobsters zip through UPS's distribution system. UPS dominates the "deferred delivery" (what consumers think of as ground service) market for small packages. Those 12.5 million daily deliveries add up to a 50 percent share of the market; the number-two deferred player, RPS (now owned by FDX Corp., FedEx's parent company), carries just 1.5 million.

Although UPS is the 800-pound gorilla of the deferred-delivery segment, the biggest profit margins are in "expedited" delivery - a niche invented by Federal Express in 1973. It costs just $7.01 to send a 10-pound package from Boston to San Francisco by UPS ground; to get the same box there the next day by 8 a.m. runs $68.25.

Competition in the expedited market is ferocious, though the business has expanded quickly enough to make room for everybody. Since the late '80s, UPS has been building its next-day air network, setting up sorting centers at eight airports worldwide, hiring pilots, and buying planes. Last year, UPS's next-day air shipments grew by 14 percent - faster than at any other company.

Last Christmas UPS delivered more than half of everything purchased on the Web.

UPS's most dangerous competitors are FedEx and the US Postal Service: FedEx because it's nimble, tech-savvy, and entrepreneurial (three words tough to apply to Big Brown); the quasi-governmental USPS because of its special treatment (no taxes, no parking tickets, and, until recently, no OSHA regulations).

Part of UPS's problem is cultural - it doesn't feel threatened. There's a lingering sense of entitlement from the days when state governments regulated small-package delivery and UPS considered its routes a divine right.

The Challenge

Despite its conservative culture, UPS has thrived upon the growth of ecommerce. Last Christmas, Zona Research estimated that UPS delivered a whopping 55 percent of everything purchased on the Web. On last holiday season's busiest day, UPS handled 17.1 million packages. (FedEx carried just 4.5 million.)

But UPS knows that the future - and the real money - is not in delivering atoms, but in managing bits. The spiffy browntails that circle the globe every night, the exquisitely maintained package cars that travel its roads, and the mammoth sorting facilities cost a fortune to operate. In 1998, UPS spent well over $1 billion servicing and upgrading its $20 billion physical infrastructure.

The race is on: Both UPS and FedEx must figure out how to make more of their money as purveyors of information and less of it from the low-margin business of delivering boxes on trucks and planes. It would be an unexpected win for UPS if it beat FedEx to the finish line.

The Visionary

Ken Lyon, the force behind eLogistics.net, is based in St. Albans, just northwest of London, but he spends the bulk of his time traveling throughout Europe and Asia - and across the Atlantic, to UPS headquarters. The short and slightly rotund Lyon, 43, is described by colleagues as "impish" and "high-energy." With his boss Jay Walsh, Lyon is cobbling together an Internet startup within Big Brown.

Among the ranks of faithful UPS employees, Lyon is an aberration. Not only is he a Brit among Yanks, he's also a fast-talking Internet evangelist and full-blooded entrepreneur. Before coming to UPS in 1991, he started two European companies that developed logistics software. The difference between the Logistics Group and the rest of UPS? "Our key differentiator," says Lyon, "is conceptual skills - using technology to make things happen, coming up with dynamic solutions." But elsewhere at UPS, he continues, "boring is sometimes good. It means there's no excitement, and everything's predictable. When you move over 12 million items a day, you need people who do stuff well but aren't particularly flashy."

The Project

As every company tries to imitate Dell Computers - carrying minimal inventory, manufacturing goods at a breathtaking pace, selling direct to consumers - logistics becomes crucial. Sleek, efficient supply chains can make the difference between profitability and bankruptcy in highly competitive businesses like consumer electronics and semiconductors. Lyon aims to create a Web-based logistics portal that will centralize the information needed by the new economy's power players: where your raw materials are, when they're arriving at your plant, what your inventory level is, how quickly your products are being delivered, what happens when there's a defect and they're returned.

For logistics gurus, this universal visibility is the highest attainment. If you can see your product at every stage of the production and distribution cycles, you can eliminate places where things bog down and cost you money. And if you harness the Internet to access a massive network of vendors, you can easily route around any problems. The result? Ruthless efficiency.

Lyon and Ian Chong, a UK-based colleague, had been brainstorming about such a system since they began working together in the early '90s. In 1993 they developed a basic prototype that would let UPS customers track shipments - regardless of whose network they were traveling on - using the CORBA platform, a pre-Web scheme for information sharing.

"Everyone thought we were way out on Planet Zog," Lyon recalls. "But we kept having ideas about how customers would manage information about shipping and logistics in a perfect world. I'd have an idea in the middle of the night, and we'd phone each other - which really pissed our wives off."

Though their prototype got shelved shortly after it was developed, Lyon and Chong kept talking - in pubs, in planes, and at customer sites. By 1996, it was clear that the Internet offered the right platform for their system. "We were doing a lot of work in Europe, and seeing that the number-one problem was access to information," Lyon says. "The velocity at which a customer's business changed was incredible, and traditional methods of managing logistics weren't fast enough.

"You can't use phones and faxes," he adds. "You need this ability for everyone to share the information at the same time; you need to enable people to customize their views of information."

As an example, Lyon mentions an auto manufacturer waiting for a shipment of brake parts. "The vendor, the dealer, and the customer could see their orders in transit," Lyon says. "What's the status, when will it arrive, where is it?"

The idea was still just a hobby for Lyon and Chong, something to soup up and polish in their spare time. It wasn't until Lyon arranged that key transatlantic teleconference in 1998 that he sought a formal go-ahead on the project. After getting the green light from Dan DiMaggio last November, Lyon began devoting himself full-time to it. Chong opted to keep his day job as UPS's European business-development director.

During the teleconference, Lyon also talked about how eLogistics.net might evolve into an open marketplace. "Globally, there's a vast number of trucks, ships, and aircraft that whiz around at less than full capacity," he explains. "Let's sell that space. It would be a more dynamic market: 'This is what I'm prepared to pay, this is when I need it delivered, and this is the level of service I want.' Fixed pricing will disappear." Shippers could bid on the amount of space they needed, specify their desired delivery date, and receive a price quote based on the availability of any carrier - big or small - with empty space. It's a captivating vision but a thorny political issue - it would mean that one division of UPS would, in effect, be directing business to its competitors.

There's a vast number of trucks, ships, and planes whizzing around half-empty. Lyon wants to sell that space.

There's also the potential for friction with UPS's much bigger ecommerce group, headed by longtime marketing exec Dale Hayes. That group, responsible primarily for making UPS more Web-accessible to customers, provides tools that let them create their own labels, estimate shipping costs, and arrange for package pickups. Hayes, who speaks at numerous Internet conferences about UPS's ecommerce strategy, cuts a higher profile in the tech world than anyone in the Logistics Group.

Though no hostility is immediately evident, Walsh worries that Hayes' group might be put off by the development elsewhere in the company of such a high-profile ecommerce project. "We've been trying to work with them so we don't step on anyone's toes or step on anyone's turf," he says.

The Team

Lyon has remained the intellectual core of the eLogistics.net project, though this past year his team grew to three full-time employees and four part-timers - specialists in supply-chain dynamics, research and development, programming, and marketing. Walsh, who is also working on CIO tasks like Y2K compliance, is so enthusiastic about eLogistics.net that he is devoting nearly 50 percent of his time to it. Walsh estimates that the eLogistics.net group will soon have about 12 full-time people. Lyon will run eLogistics.net from the UK so he can straddle time zones in Asia and the US - and (though it goes unsaid) so he can have some distance from UPS's hidebound office culture in Atlanta.

Results and Expectations

April came and went with no sign of eLogistics.net. Lyon was stingy with explanations, offering only the obvious: "Organizationally, we weren't able to do it." From what Walsh says, it seems the corporate bureaucracy at UPS may have thwarted the team's rush to market: "It's a longer process, getting the legal and financial reviews, putting together the business plan, and making sure the parent company blesses it." Just recently, the final decision was made to brand the offering eLogistics.net, after a group of marketers struggled to come up with a better handle.

Logistics Group CEO DiMaggio puts on a poker face when discussing his expectations for eLogistics.net. He says it's only one of a half-dozen promising ecommerce projects incubating in his group. "Not everything is riding on this," he says. "I didn't want to put all my eggs in one basket."

But execs who are closer to the project - like Walsh - get giddy when talking about their hopes for eLogistics.net. He projects it could become a $100 million business within two years of launch, now set for later this year.

In an unusual move by UPS, eLogistics.net was established as a separate company, a fully owned UPS subsidiary, and there's some organizational buzz that the arrangement is part of a long-term plan to attract outside investors and eventually take it public. If that happens, and the offering is successful, all the employee-shareholders of UPS would benefit. "We've been a little jealous of some of these so-called Internet companies, since UPS is privately held," says Walsh. "FedEx has dubbed itself an Internet company, and its stock has more than doubled. If we had a separate Internet company, we could potentially leverage what's going on out there in the market."

Lyon is slightly more cautious about predictions. "What really scares me are the little companies that never register on your radar screen," he says. "But if we're extremely lucky and smart, we can establish this as the premier brand, and companies will come to the site for their logistical service support. But it's really all a gamble, you know? This is the Internet."